Treasury yields were little changed to slightly higher on Monday as traders considered arguments against a dovish policy pivot by the Federal Reserve in early 2024.
What happened
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was unchanged at 4.455% from Friday’s 3 p.m. Eastern time level. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 2.8 basis points to 3.955%, from 3.927% on Friday. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
climbed 4.2 basis points to 4.068%, from 4.026% on Friday.
What drove markets
The benchmark 10-year Treasury yield and its 30-year counterpart remained not far from their lowest levels since July, in response to the Federal Reserve’s apparent policy pivot last week. Fed officials penciled in the likelihood of 75 basis points in rate cuts in 2024, and Chairman Jerome Powell surprised financial markets with more dovish comments than expected at his press conference.
However, the optimism has cooled somewhat in recent days after Fed officials — including New York Federal Reserve Bank President John Williams and Chicago Fed President Austan Goolsbee — pushed back on rate-cut expectations.
On Monday, Bill Dudley, the former New York Fed president and Williams’ predecessor, wrote in a Bloomberg column that the central bank is betting on a scenario of further declines in inflation that will make earlier, more-rapid rate cuts possible.
Markets are pricing in a 91.7% probability that the Fed will leave interest rates unchanged between 5.25%-5.5% at its next meeting at the end of January, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by its subsequent meeting in March was seen at 63.4%, compared with 28% a month ago.
In U.S. economic updates on Monday, homebuilder confidence rose in December for the first time in five months as mortgage rates fell.
Outside the U.S., European Central Bank President Christine Lagarde and Bank of England Gov. Andrew Bailey have both fought back against talk of possible rate cuts in their regions.
What analysts are saying
“Central bankers have begun to push back against the prospect that easing could begin in March in the U.S. and the Euro area. We agree, as there are a number of steps to go through before the Fed, ECB, or BoE can cut, especially with the reporting lags in the ‘hard data’ they’d need to see,” said Thierry Wizman, global FX and interest-rates strategist, and others at Macquarie.
“The ECB and BoE are especially attune to the wage data — the main ‘hold-up’ to a clearer easing signal in the Euro area and U.K. But the Fed has [to] overcome the wage hurdle.” As shelter rents drive disinflation, “the Fed could cut sooner than its peers — in May or June,” they said in a note.
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